"Building Community Relations Essential for ESG Success in Startups"

The most significant asset of an early-stage startup is its community, writes Taavi Kotka, chief executive and founder of Koos.io, as it plays a crucial role in driving business growth and adoption without expecting any clear or immediate return.

• The most critical corporate secret is that startups consistently outperform their rivals regarding ESG credentials.
• For early-stage startups, the boundaries between employee, customer, peer, and friend are often unclear; it’s more effective to consider these individuals – and thus the social aspects of ESG for startups – as part of the community.
• That’s why startups should focus on strengthening community relations as the cornerstone of their social and broader ESG strategies.

An environmental, social, and governance (ESG) framework has become a significant corporate trend in recent years. It has allowed global giants to showcase their environmental and employee achievements and provided an opportunity for business consultancies to produce countless new reports and frameworks. The most critical corporate secret, however, is that startups consistently outperform their rivals regarding ESG credentials.

It is believed that at least one-third of startups are purpose-driven, and by pursuing a greater cause than just profit and growth, they inherently align with most ESG criteria. Even for startups that aren’t purpose-driven, it’s much easier to incorporate positive practices into the company as it develops than for large corporations to undo and rebuild. Moreover, for early-stage startups that find it difficult to justify investing time and money into ESG, the situation remains favourable as their ESG performance improves as they grow.

One factor that stands out above all others is investor attitude. Partly driven by the pandemic, investor interest in ESG has surged, with an estimated 67% of investors planning to buy more shares in ESG-focused companies. This fact alone should change the mindset of any startup founders who doubt the value of ESG.

The elusive ‘S’ in ESG

We can easily recognise the elements of good environmental, social, and governance practices. Carbon-neutral companies that actively minimise their water usage, pollution, and waste production across their supply chains score well on environmental practices. Those that use independent auditors have a diverse board and implement organisational accountability practices to perform well in governance.

However, the ‘S’ in ESG is often more challenging to define. If you ask an ESG expert, they might say that startups “must build a strong social contract with employees, including ‘living’ wages, an inclusive culture, and support for mental health”. Alternatively, suppose you’re funded by socially responsible investors (SRI). In that case, you might be expected to promote “diversity, inclusion, community-focus, social justice, and corporate ethics, in addition to fighting against racial, gender, and sexual discrimination”.

Surprisingly, startups don’t seem to struggle with these social requirements. In fact, according to the ESG VC 2022 report, startups perform the strongest in the social aspect, with 41% of Series C+ startups holding the top ranking of four stars, compared to just 7% for environmental.

Unfortunately, ESG is often viewed through the lens of large corporations. While the ‘S’ in ESG traditionally focuses on employees, the reality of early-stage startups is more complex and dynamic than that.

For instance, most founders receive informal, unpaid favours during the initial stages of building their business – from friends, peers, and acquaintances willing to help by making introductions and calling in favours from their networks to help the company gain momentum. If any payment is made, it’s likely in the form of thank you food and drinks or other small gestures. These casual yet dedicated working relationships may continue for years as the startup grows, without the advisor, freelancer, or consultant ever becoming an official employee.

As a result, for early-stage startups, the boundaries between employee, customer, peer, and friend are often unclear. It’s more effective to consider these individuals – and thus the social aspects of ESG for startups – as part of the community. That’s why startups should focus on strengthening community relations as the cornerstone of their social and broader ESG strategies.

The power of community

The most significant asset of an early-stage startup is its community. This community plays a crucial role in driving business growth and adoption without expecting any clear or immediate return.

Individuals within a company’s community make a meaningful contribution, and smart, community-led startups will incentivise them, understanding that this will help facilitate further growth. Community relations, then, is all about reciprocity. Creating a vibrant community beyond employees means benefits must flow between the business and its supporters.

However, there are currently very few ways for founders to formally acknowledge their community’s contribution, let alone incentivise their continued efforts into the future. While shares and options can be powerful tools to motivate people to go the extra mile, these schemes are generally designed for employees or investors rather than informal contributors and advocates, and are too often provided on a transactional basis. Moreover, founders cannot continually offer discounts or lower prices to keep their community engaged and supportive.

Instead, it’s surprisingly straightforward for communities to earn and own equity-like stakes in a startup by allowing business success to be shared by the people who contribute to it through stakes that provide a return when specific goals are achieved.

Hence, the ESG benefits are pretty evident here. A strong community showcases a company’s commitment to its people by establishing genuine and loyal relationships. Ultimately, it simultaneously delivers growth and social impact– at the core of ESG – thus helping businesses to ‘scale with soul’ and give back as they grow.

Paving the way for a more equitable society

Since its rapid rise in popularity, ESG has always been about significant, strategic conversations in business. How can companies do good and make a positive impact on the world? How can they combat inequality in all its forms?

Startups can actively improve ownership fairness by focusing on their communities. These relations are the key to empowering individuals who are often overlooked or marginalised by business, and therefore creating a genuine social impact through ESG: not bad for a corporate buzzword.